The factors that affect the likelihood and sustainability of collusion Essay

The factors that affect the likelihood and sustainability of collusion in a specific industry - Essay Example Fundamentally, collusion is aimed at restricting or distorting competition within the market that the firms in that industry serve, and thereby reap the benefit of high and uncontrolled profitability. Therefore, this analysis seeks to establish the factors that affect the likelihood of collusion within the Air Travel Industry, and how such collusion is sustainable. Factors that affect the likelihood of collusion and sustainability in the Air Travel Industry Hypothetical Case: Air Canada and West Jet have been accused in colluding on fares on direct flights from Edmonton to Fort McMurray. The Air Travel Industry is an industry that is fairly competitive, considering that there are various airlines that operate within any given country or region, thus making the business of air travel fairly competitive3. Nevertheless, the Air Travel Industry also presents the opportunity for creating a monopoly or an oligopoly, considering that it is an industry that has low number of players. ... Therefore, there are high barriers to the entry for new firms, considering that economic barriers such as the high cost of entry prevent investors from being able to enter the Air Travel Industry4. Thus, barriers to entry form one of the structural features of the market and industry that make collusion more common and sustainable in this industry. The market and industry structure of Air Travel entails a high initial cost of entry, because purchasing and licensing an aircraft to be used for Air Travel purposes is a costly affair, in addition to the legal barriers that are brought about by the government tight control of the industry5. Further, the Air Travel Industry depends highly ion the benefits of the economies of scale in order to survive and thrive to profit earning levels, which requires that the firm operating in the industry should have several aircraft that operates in different destinations, both locally and internationally, to ensure that the route that earns low profits is compensated for, by the one earning high profits, thus the average profitability of the firm becomes substantial6. This is an aspect that serves to reduce the threat of new entrants, since the new entrants will be required to purchase several aircrafts, and undergo the restrictive government legislation procedures in order to finally enter into the industry, thus making the threat of competition low7. It is this low threat of competition that serves as an incentive to encourage the collusion between the few firms that have managed to operate in the industry, and thus make such collusion sustainable, considering that virtually all the firms operating in this industry have overcome the market challenges involved, and thus no single firm